The Commitments of Traders (COT) reports can sometimes give traders a vital concept of future significant moves in the market. In order to report the net positions twice every month, the CFTC requires large speculators and commercial traders, or hedgers. Primarily, fund traders and professional traders carrying large positions are represented by the large speculators or the non-commercial traders. Commercial traders also report their net positions to the CFTC. The number non-reportable positions are derived from the difference of the number of large speculator and commercial positions from the total open interest. This group of traders is usually thought to be small speculators and hedgers who aren’t holding an edge large enough to report back to the CFTC.
The COT report’s results are often used as a tool to offer traders a far better understanding of the psychology of the marketplace, internet position of the commercials within the market and the net position of the large traders. Large traders (funds) are typically trend-followers and can add or liquidate their positions counting on the technical action of the market since the discharge date of the report. There are many various ways to research the reports, but we believe that for the foremost part the massive traders’ net position and “change in position” over a two weeks period are the most important numbers to watch. Keep in mind that the tiny trader’s net position is typically susceptible to either long liquidation or short-covering if the market starts to maneuver against them.
As a result, a classic bullish set-up for a given market would be when large traders are net long and little traders are net short. The market will be in a weakened bullish set-up “if” the two-week trend in the large trader position is down, or in other words, if the funds are in the process of liquidating their net long position. This is a warning flag. The larger internet short position of the tiny trader (relative to history) and therefore the extent that tiny traders are holding an edge “against” the trend are factors which will add to the bullishness of the report.
A classic bearish set-up within the market exists if large traders are holding a net short position (more bearish if adding to the position within the past two weeks) with small traders net long the market (more bearish if net long position is comparatively large and therefore the trend is decisively down). One exception we have noted recently is the ability of the small trader in T-bonds to hit the correct direction of the market. It is also important that the COT report with futures and options (released at some point later) confirm things that’s indicated by the futures only report.